Select Committee on Trade and Industry Minutes of Evidence


Examination of Witnesses (Questions 20-39)

MR ADRIAN HAM, MR MIKE KIRWAN AND MR RICHARD MAYSON

TUESDAY 13 NOVEMBER 2001

Mrs Lawrence

  20. In both your submissions to this Committee and to the PIU, you do not suggest in any way at present that there is an economic case persisting in nuclear power. You also acknowledge that nuclear power will not be viable for the foreseeable future without the support of government, both in terms of mitigating market forces and in terms of taxpayers' support for dealing with the problems of waste. You also accept that there is over-capacity in the general fuel market in your evidence, but you argue that it is vital to underpin the nuclear power industry in order to achieve both diversity and to meet the Government's environmental commitments. Why do you think that there are no cheaper solutions?
  (Mr Ham) I think it is a matter of what appears to be available in the market at present and I believe that your Committee, Mr Chairman, will be interviewing people representing some other forms of generation who may also be making comments about current market conditions. It just is a fact that the market price for forward contracts for electricity collapsed over the past 15 months or so and that, at current market prices, it is very difficult to see a justification for setting up a new construction programme not just for nuclear but a number of other types of generation too. We are talking at a strategic level. Clearly we are an industry which produces power around the clock: base load: and, as you know, has lifetimes which are fairly predictable in engineering terms. We are saying that strategic decisions because of the long lives involved have to be taken now—and we are talking about strategic, not practical decisions—if the country desires to have the degree of security of supply in the future that nuclear gives and if it wishes to guarantee the CO2 free nature of a large chunk of base load production. We believe that that cannot be provided by renewables as they appear at the moment. So, it is not a matter of us coming and saying, "Nuclear is an absolutely special case for special treatment in the market", it is a case of us saying, "At the moment, the market does not recognise the benefits of CO2 free generation from nuclear power" but, in our view, it does not fully recognise them from some other forms of power as well and clearly that is not rational. If you have an overall strategic view that polluters should pay, and CO2 is certainly a form of pollution, the polluter does pay in general for CO2, that must be rectified if the power in the country in the future is going to deliver CO2 free electricity which we believe it should do.

  21. So security of supply is what you are talking about in essence—
  (Mr Ham) And the environmental imperative.

  22. It is purely related to the CO2 element.
  (Mr Ham) No. There are two issues. One is security of supply. You could say, let us depend entirely on French nuclear power. After all, they export 60 terawatt hours to other parts of Europe at the moment. Incidentally, every country thinks it imports the non-nuclear bit, but never mind. We could increase the size of the interconnector considerably/massively, and you would have to massively increase it, and be reliant for a quarter of the country's power on France. I have not heard anyone argue that case, but I imagine somebody could argue it and I should think EDF would be very interested to talk about it, but it does not seem to me to be a sensible case looking at it as, if you like, an energy professional.

  23. We have been talking about security in terms of security of supply. The evidence that you submitted to the Committee was dated October, but there is another aspect of security which has not in any way been covered in your submission.
  (Mr Ham) That is correct.

  24. And, in view of the happenings of 11 September, I would be interested in any comment you might have on the integrity of power stations in the event of terrorist attack.
  (Mr Ham) You raise a very important issue in this Committee. We take the issue of terrorism very seriously. The grave and tragic events of 11 September have been taken extremely seriously in our industry. Any industry which deals with hazardous material, whether it be petrol, oil, gas or nuclear, must take such incidents very seriously and we know that it is a matter of great public concern. It has been under appraisal with the major agencies inside government responsible for security at sites and a very significant amount of work has been done. However, we in the industry feel that to go into fine detail of security of any sites is something which we are unable to do and we suggest to the Committee that you would also understand why that would be unhelpful from a national interest point of view.

  25. My interest in that question is in relation to the cost. Presumably it would also add to costs when you have made the point in your evidence that at present there is no economic reason. Presumably the measures you have to take—and I understand your reasons for not wishing to disclose those—would have a further cost implication?
  (Mr Ham) I believe our assessments have suggested that the cost implications considering the 30 year lifetime of potential new nuclear plant would not be a significant factor in the lifetime average costs of such plant. We do not see any reason to change that view because the capital costs of plant such as ours are considerable anyway and the modifications necessary are not in our view major factors which will change the overall views of the lifetime costs of nuclear plant

Chairman

  26. At the moment, we have some 15 stations in the two fleets if I recall correctly. Have you made any assessment of what it would cost to make them secure for the varying lifetimes that they still have?
  (Mr Ham) May I just make an overall comment. There is an independent nuclear inspectorate, the NII, and they do assess constantly and review, just as the companies themselves do, the safety of that site and, if either of the companies believed that it would be safer not to run plant for any reason, whatever it is, or the NII take the same view, they would order them to be closed. So, we do not believe that the sites are unsafe at the moment.

  27. Given the heightened awareness of what are to all intents and purposes kamikaze style attacks, we have nuclear repositories and, although they might no longer generate, they are highly radioactive. Were they to be the subject of detonation, the dispersal of materials into the atmosphere would obviously have quite tragic consequences. So, we have already potential targets. We are not talking about targets which may come in the future, planning permission being granted and the economic circumstances being favourable. Have you done any assessment of what it would cost? Have you been in discussions with the NII about the security related problems that the nuclear industry has to now take account of post 11 September?
  (Mr Ham) We in the industry have been carrying out intensive discussions with the various government agencies responsible for the nation's security and discussions have also taken place with the NII along those lines. I wonder if either of my colleagues want to add anything to that.
  (Mr Kirwan) Just in terms of the cost for one specific company, British Energy, as you know we have nuclear power stations in Canada and the US and in all cases we have been going through similar discussions and making similar improvements and enhancements in facilities, and we in fact announced at our half-year results announcement last week that we expect the annual cost to be about £10 million covering all three countries where we have nuclear power stations, so it is a manageable cost.
  (Mr Ham) Which includes Canada and the US.
  (Mr Mayson) I do not have anything to add.

Mr Burden

  28. If I could take you to back to your answer to Mrs Lawrence's first question, if I understood what you were saying correctly, you were saying that long-term strategy should take precedence over short-term commercial considerations. If I am right and that is what you were saying, could I just ask you to give a little more detail on your view on nuclear fusion because in the evidence put to the PIU study by BNFL, it did say that it did not seem logical that large funds should be directed towards fusion which is so far from commercialisation even though it promises much, when it says that fission is being starved of essential investment now. If you consider the issue of long-term thinking to fission, why can you not apply it to fusion?
  (Mr Ham) Fusion has looked promising for a long time and I am sure that it is still promising. However, more promising from the point of view of economics of, if you like, nuclear power internationally is greater standardisation of design and international licensability of design. In other words, perfecting and standardising across countries a more limited number of designs. This seems to be, from the industry's point of view, where the promising lines of development for the economics of nuclear power within the next two decades lie. Beyond the next two decades, clearly we enter a much more speculative area and it would be very regrettable if research in fusion were to stop on the grounds that that is a long term question. We do know that, in other countries, their view of the long term is much further ahead. A discussion that we had with representatives from the embassies of Russia and Ukraine the other day during one of the party conferences suggested that their view of long term is 80 years. The Russians are concerned about possible shortages of gas which, given that they sit on one-third of the world's known reserves, is fairly amazing, but they clearly take a different view of the long term than us. From our point of view, we feel that the focus has to be the period when we are facing retirement of nuclear plant within a relatively short period of time. We are talking about retirement only in a couple of decades in most of the plants that exist, that seems to us to be a big priority now in terms of getting the strategy right.

  29. Are you suggesting that there should be a switch of international R&D funds away from fusion towards fission?
  (Mr Ham) No, I do not think we are suggesting that at all.
  (Mr Mayson) I think it is important that the UK does contribute to long term research and development programmes. The fusion one is clearly very much for the longer term, two to three decades away.

Chairman

  30. Is it not the case that one of the casualties of privatisation has been the sizeable research project that we used to have in electricity and power generation generally?
  (Mr Ham) Yes, I think that is perfectly true and that is unfortunate and maybe that is one example where you cannot rely on the market for everything. We do believe that the events of the past decade have shown that. You cannot rely on the market for everything although it is very, very powerful and, certainly in terms of long term research, that certainly is an area where Government clearly has a major role.

Mr Djanogly

  31. Going back to terrorism, presumably there has been a study as to the potential problems that could arise from terrorism activity. Things have been mentioned but I am not quite sure what is implied. If the New York type attack happens at a power station, what would the effect of it be and, if we were to build new power stations, could design improvements be made that would stop the problem? Could it be put underground, for example? Secondly, going back again to Mrs Lawrence's point, just moving the point forward slightly, what would be your preferred mechanisms for achieving a revitalised role in the energy market?
  (Mr Ham) You asked two very important questions. On the issue of terrorism, I hope it is understood by the Committee that what can be said in public about the detailed aspects of possible terrorist attacks of any hypothetical kind whatsoever is very limited. What we can reassure the Committee on is that there is no way in which the industry would ignore tragic events like 11 September and not consider in full how those affect the safety of the industry and its sites and those have been taken very seriously in conjunction with the major responsible organs of security of the state because of course we could get into an area where the nation itself has major responsibilities for protecting the industry and the lifelines of energy supply. Those things have been thought about very thoroughly indeed. We really cannot go into fine detail here. We are unable to do that. I hope the Committee sees and understands that, in public session, this might be unhelpful. On your second question, which is also very important, what we are really saying is that I believe all parties agreed over the past decade that `polluter pays' principle should apply and when you see the Royal Commission recommending a 60 per cent cut in CO2 emissions by the middle of the century, to sacrifice the savings of between 12 and 24 million tonnes of contained carbon, as the nuclear industry currently saves, which is incidentally the emission level of half the passenger cars of Britain, over the next two decades seems regrettable simply because there is no mechanism inside the market which reflects the benefits of CO2 free supply. We are not saying, "Just do something for nuclear." We feel it is important that all forms of CO2 free electricity supply should be encouraged, so we are asking for an even-handed approach which does not exist under current arrangements and that is what we would like to see inside the electricity market. With regard to the issues of finance, clearly that depends on a dependable and long term stable market existing and stable arrangements. We have had one major upheaval in the British market quite recently with NETA as you will know and I am sure that you will be talking about NETA on other occasions. There is also the issue of European integration and it seems to me that one might expect, say, the Germans to accept adopting the British rules developed for Britain of NETA just as happily as they decide to drive on the left-hand side of the road. I would say that the industry is expecting that, at that stage, there will be another potentially significant upheaval in terms of market arrangements. This is not a happy situation for any form of very long term generation and that applies for major capital intensive renewable projects just as much as it applies to nuclear.

Sir Robert Smith

  32. Just to emphasise following up on that point that, if there were a regime that recognised more accurately the problems of carbon emission and there had been a more stable long term planning horizon, do you think that the renewables would be in a much fitter and stronger place if they had that kind of market to actually fill some of the gap that the nuclear will be leaving?
  (Mr Ham) From what I read of newspaper reports, a number of renewables have considerable difficulties with current NETA arrangements and we think that is regrettable because our view overall is that we are talking about a replacement build of nuclear to take up 25 per cent of electricity supply. We are not talking about somehow nuclear going up to French levels of 80 per cent or so. Therefore, there must be a major role for renewables. We would like to see many more renewable sites playing a role in this market. We think they would benefit from that kind of stability just as much as the nuclear industry itself.

Mr Berry

  33. In your submissions to the PIU, you quite rightly say that the economics of nuclear power is complex and that it depends on assumptions about price scenarios, it depends on how you deal with externalities and so on. Yet, after a mere two sides of A4, you conclude that nuclear generations costs can be competitive in the future without, it seems to me, any clear indication of what assumptions you are making about prices etc. Is your submission not essentially anecdotal? Have you used any more rigorous appraisal of the economics?
  (Mr Ham) Firstly, such economic analysis of the economics of future supply has been carried out in the industry a number of times before and the industry has carried out quite a lot of scenario work and certainly there are scenarios of the development of fossil fuel prices in which nuclear would be attractive, so a great deal of, if you like, number crunching has gone on in the industry over the past decade. We are currently carrying out an exercise to analyse the economic significance of an important renewed replacement nuclear programme and the results of that will be available at the end of this month, but I would not regard our submission as entirely anecdotal or really partially anecdotal, but energy is a complex business as the Committee is well aware and we have to talk about a number of key issues and I believe our submission majored on the fact that you cannot get away, however much you model, from the fact that Britain is about to lose over two decades 25 per cent of its electricity capacity which is currently carbon dioxide free. How is that replaced? That may be anecdotal but it is a fact.

  34. That is not anecdotal, that is a fact and it is an important part of the argument. It does not however address the issue of costs as compared to alternative fuels. Let me raise a couple of specific questions. At present, nuclear generation costs are significantly higher than the gas fired generation. In your submission to PIU, you suggest that the cost for new reactors may be as low as 2p to 3p per kWh. Could you just clarify the main reasons why you estimate these decreased costs?
  (Mr Ham) One of my colleagues would like to come in on that, but I just wonder if you can say what gas price you were assuming in your comment about gas generation before Richard comes in.

  35. Before the gas price rises, it would be about 2p, would it not?
  (Mr Ham) How many pence per therm? What is the gas price you are basing that comment on?

  36. You are giving evidence, why do you not tell me. Could I have your estimate of the current cost of nuclear generation as compared with the current cost of gas. That would be very helpful.
  (Mr Mayson) I would like to pick up on your point about the—

  37. With the greatest of respect, do you mean that you do not know or that you are not telling?
  (Mr Mayson) I think British Energy would like to pick up the current costs.

  38. You are the people who should know more about the facts and the costs than I do.
  (Mr Ham) I know that Mike is dying to come in on this one, but the current costs of, say, CCG generation depend on exactly what sort of gas contract people have signed. Gas contract prices vary enormously and gas at the margin is rarely between 10p a therm and more than 20p a therm just in the last 15 months and, I am sorry, I must ask the Committee's forgive for posing a question but of course when one talks about generation costs, one has to know all the basic background assumptions. Mike wants to come in on the cost issue.
  (Mr Kirwan) The operating cost of British Energy's existing nuclear power stations is about 1.8p per kWh and that is actually going down as we are improving the output at stations and reducing costs. We set ourselves a public target of 1.6p per kWh. So, in terms of the operating costs of existing power stations, British Energy stations are competitive with existing gas fired power stations. I think the issue as far as the energy policy review is about the cost of new build nuclear stations against new build gas stations and that is what our evidence covered. New build gas stations depend very heavily on the cost of gas, but if you assume gas at about 20p per therm, which is roughly current market prices, gas stations are expected to cost around 2.3p per kWh which compares with the current market price of 1.8p. So what is quite clear is that nobody is going to build a new power station of any sort at all at the moment and everything will be uneconomic but, as prices rise, as they will do when the current capacity surplus reduces, the most economic in the short term is the one that will be built. That is gas. The costs that are estimated, particularly by BNFL and I am sure that Richard Mayson would like to say some words about the basis of that, are that new designs of stations currently being licensed in the UK and available to be built in the timescale that we are talking about for commissioning in 10 years' time can generate, over lifetime, at between 2.2p and 3p per kWh though the prices vary depending on whether you are building one single power station when all the first of the kind costs are borne by that station or a series build, five or six, when you will be seeing costs towards the bottom end of that range.

  39. The assumptions are crucial, are they not? What assumptions are you making about the cost of waste management?
  (Mr Kirwan) The assumption is it will cost in line with the experience in the US where similar stations are already operating. There the price charged on a fixed fee by government is $1 per mWh. The government agency, the Department of Energy, have just conducted a review within the last 12 months of whether that properly reflects the true cost of storing and disposing of fuel from PWR reactors and they have confirmed that that is a correct cost, so there is no increase in that fixed levy paid by all generators in the US and our belief is that that would be a comparable cost in the UK, so we have built that cost in; it is 0.7p per kWh.


 
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